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A seven-year-old case of front running has come back to haunt HDFC Asset Management Company, which runs the country's top fund house HDFC MF, with regulator Sebi seeking explanation on alleged violations of various capital market regulations.

A show-cause notice has been issued by Sebi to HDFC Asset Management Company and other entities for alleged violations of regulations and code of conduct governing mutual funds, brokerage firms and portfolio management, among others.

In the notice, Sebi has asked these entities to explain why penal action should not be taken against them for failing to comply with the relevant regulations, sources said.

When contacted, the fund house said it is in the process of resolving the issues with Sebi and the concerned dealer, whose alleged misconduct was at the core of the case, was no longer with the organisation.

"This issue relates to the same alleged misconduct of the same dealer, Nilesh Kapadia who is no longer with the organisation since June 2010. We are in the process of resolving the issues with the regulator in accordance with SEBI rules," an HDFC AMC spokesperson told PTI.

The matter relates to trades conducted in 2007 and Sebi had begun its probe after receiving two separate references from the BSE and NSE on suspected instances of front-running of the orders of HDFC Mutual Fund (MF).

Front-running refers to an unethical practice of someone trading in shares on the basis of advance information given by a broker, analyst or other executive at a market intermediary before the trades are conducted by that entity.

This practice increases the cost of acquisition of shares or reduces the realisation from the sale of shares for the concerned fund house or other market intermediary, thus adversely affecting the interest of common investors.

In this case, the exchanges found "certain coincidence" between trading pattern of three individuals – Rajiv Ramniklal Sanghvi, Chandrakant P Mehta and Dipti Paras Mehta -- with that of HDFC AMC.

On further probe, Sebi found that trade orders of HDFC AMC were getting executed through a common dealing desk within the AMC and Nilesh Kapadia, then Assistant Vice President (Equities), was its equities dealer since June 2000.

The investigation also revealed that Kapadia was tipping off and advising Rajiv Sanghvi (also his college mate) to trade ahead of the orders of HDFC AMC and had helped him make substantial gains in the process.